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The Brazilian Mercantile & Futures Exchange (BM&F) announced on October, the 24th, the creation of new derivatives contracts and volatility structured transaction. During a lecture coordinated by Alvaro Mendonça, the Exchange’s Financial and Environmental Product director, brokers and analysts were given the details regarding the new contracts. The lecture was transmitted live via video-conference to the Rio de Janeiro Stock Exchange and is available at www.bmf.com.br (Portuguese only).
New contracts
The new contracts are: Global 2037 futures; 10-year Treasury Notes futures; US Dollar call and put options with reset; and US Dollar Volatility. The Global 2037 futures contract has the same characteristics as the current Brazilian sovereign debt bond contracts regarding trading hours, costs, contract size, settlement, and expiration months.
The new contract completes the ensemble of Brazilian securities issued abroad. The 10-year US Treasury Notes futures contracts will allow the negotiation of spread over treasury, in other words, of the Brazil Sovereign Risk, when combined with the Global futures. Both new contracts will be launched on November 10th.
Options with reset
BM&F will launch on November 24th US Dollar call and put options with reset. The main difference of this contract, in relation to other options contracts traded at the Exchange, is the existence of daily settlements like in futures contracts.
Options with reset are a financial instrument frequently used in the international market. This type of financial instrument does not require the payment of the option premium, as there is the daily settlement. The sum of the settlements will be the equivalent to the option premium, in case it’s not exercised, or equivalent to the holder’s gains, in case it is exercised.
Options with reset have two advantages in relation to traditional options contracts. The first advantage is tax related. This type of contact is more efficient from a tax-payer point of view, in comparison to transactions that involve futures and options without settlement. The second advantage is related to the reduction of margin requirements.
Margin requirements of liquid assets do not allow risk compensation between futures and options without reset due to cash flow risk. With options with reset, there can be risk compensation, and thus margin reduction.
The US Dollar Volatility (VCA) structured transaction will also be launched on November 24th. This transaction will have the same characteristics as the structured transaction with options without reset (VTC), but will use options with reset. The transaction involves options with reset on US dollar contracts and US Dollar futures contracts.
